The Bank of Japan’s key business sentiment survey, known as the Tankan index reported disappointing results today.
Large Japanese manufacturers that were surveyed gave a pessimistic outlook as the index gave a worse than expected reading in the fourth quarter.
The headline index, covering major manufacturing firms, like Toyota Corporation and TDK, fell to -4 from September’s reading of +2. This was below expectations for a -2 result.
The large manufacturers expected conditions to worsen in the current quarter, predicting a -5 reading for the next tankan in March.
Many larger manufacturers in Japan had been affected during the previous quarter from major flooding in Thailand, where they and their suppliers have facilities.
The European debt crisis is hitting manufacturing as well a Europe is a large export destination for many Japanese exporters.
“The outlook completely hinges on what happens in Europe,” said Yoshimasa Maruyama, an economist at Itochu Corporation in Tokyo. “If the debt crisis worsens further and spreads to the U.S., that could spark a recession there too and that would mean a recession for Japan as well.”